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“No amendment” clauses: Court of Appeal guidance

A Court of Appeal decision published last month has concluded that so called “no amendment” or “anti-variation” clauses do not rule out informal amendments being agreed contrary to their terms. The making of informal agreements is common on construction projects and “anti-variation” clauses are frequently found in construction contracts, including some standard forms. The court’s decision resolves previous conflicting authority over the effectiveness of these types of clauses and whilst denying their effectiveness in absolute terms provides some guidance as to how they may be strengthened.

Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd

TRW, a producer of electric power-assisted steering systems, entered into an exclusive supply agreement with Globe, a component manufacturer, which included a clause stating that: “This Agreement … can only be amended by a written document which (i) specifically refers to the provision of this Agreement to be amended and (ii) is signed by both Parties.” The court was asked to consider whether, despite this clause, the parties had made a binding oral agreement to novate or vary the contract to include a third party subsidiary of Globe.

The court considered the following two previous Court of Appeal decisions in making its decision:

1. United Bank Ltd v Asif, where a clause precluding variations to a Deed of Guarantee without a signed written agreement was held to overrule a subsequent oral agreement; and

2. World Online Telecom v I-Way Ltd, in which an oral agreement was found to be a valid amendment despite the presence of such a clause, on the basis that commercial parties have “made their own law by contracting, and can in principle unmake or remake it”.

The court unanimously followed World Online Telecom to decide that, in the absence of statutory or common law restrictions, parties to a contract are free to amend or alter an agreement as they see fit. They cannot “effectively tie their hands so as to remove from themselves the power to vary the contract informally”.

The court also made reference to clauses commonly found in building contracts whereby extra work is not to be paid for unless ordered in writing. The court agreed with a previous decision of the High Court of Australia (Liebe v Molloy) in finding that such clauses could not preclude a claim for extras based on an oral agreement or an agreement by conduct.

Conclusions and implications

The court’s decision means that parties should not place undue reliance on “no amendment” or “anti-variation” clauses to protect them from informal variations. Particularly on construction projects, where informal communication between party representatives occurs on a daily basis across a broad range of issues, the potential for binding agreements to be made orally or by conduct will remain despite clauses requiring amendments, waivers or changes to be agreed in writing or with certain other formalities.

The court’s decision indicates, however, that such clauses may still be taken into account in considering whether any subsequent agreements are effective in binding the parties. As the court noted:

“In many cases parties intending to rely on informal communications and/or a course of conduct to modify their obligations under a formally agreed contract will encounter difficulties in showing that both parties intended that what was said or done should alter their legal relations; and there may also be problems about authority. Those difficulties may be significantly greater if they have agreed to a provision requiring formal variation.”

The court’s comments in this regard potentially suggest ways in which these types of clauses can be strengthened. As we noted in our previous Law-Now on this topic earlier this year (see here), parties might:

Include within their “no amendment” clauses a statement that any informal agreements are to be “subject to contract” until included within a duly executed written agreement.

Specify in their “no amendment” clause that only specific individuals or specific classes of individual (e.g. Directors) will have authority to agree binding contractual amendments.

Such enhancements are likely to increase the chances of a “no amendment” clause achieving its intended effect, but in light of the present decision no clause will provide absolute protection in all circumstances.

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